JOSEPH GIGLIO: Massachusetts and a free Market (Basket) economy

Is the sole responsibility of executives and boards of directors to maximize the value of stockholders or are they responsible to a broader array of stakeholders that include customers, employees, suppliers and host communities?

The bitter clash between factions of the DeMoulas family, the major shareholders in the Market Basket supermarket chain, once again raises the issue of corporate responsibility. Is the sole responsibility of executives and boards of directors to maximize the value of stockholders or are they responsible to a broader array of stakeholders that include customers, employees, suppliers and host communities?

In recent decades, a grand total of two options have evolved for dealing with the issue of corporate responsibility. If you believe businesses should exist unmolested, solely to serve the interests of stockholders, then the late economist Milton Friedman is your man. He was the most outspoken advocate of that view and argued that corporate social programs add to the cost of doing business. Spending money to reduce pollution, for example, makes a business less profitable.

Many management gurus counter that there is danger in focusing solely on profitability. An overzealous pursuit of stockholder returns can encourage maximizing short-term rather than long-term returns. Such an orientation leads to actions like cutting expenditures judged to be nonessential in the short term such as research and development. The resulting underinvestment jeopardizes long-term returns.

But managers still make these decisions because their adverse effects may not become apparent to stockholders for several years, during which time the business is turning big profits. By the time the chickens come home to roost, the team responsible for the decisions may be gone. Making decisions for the long-term is as foreign to many CEOs and boards of directors as it is to politicians.

The near financial meltdown in 2008 and the subsequent Great Recession demonstrated the large and diverse group of stakeholders who are affected by companies’ actions. In the wake of this shock to free-market capitalism, the traditional view of corporate responsibility is giving way to a belief that enlightened self-interest requires a business to consider all important stakeholders when running the enterprise, not just stockholders.

Stockholders provide the business with capital, but if customers don’t get value for their money they can take their business elsewhere, employees provide labor and expect commensurate income and job satisfaction in return or they can leave their jobs, suppliers seek dependable buyers, and local communities want firms that are responsible citizens.

To create customer value, most firms rely on a network of stakeholders. In determining company goals and strategies, executives and board members must recognize that each has justifiable reasons for expecting and often demanding that the firm take its interests into account. Family-owned businesses such as Market Basket are no different.

Various stakeholder claims are reflected in specific demands like high wages, clean air, job security, product quality, community service and tax revenue. Although these claims represent desirable ends, they must be prioritized based on what the company views as their relative importance.

Page 2 of 2 - The claims of different groups may conflict and few firms have the resources to satisfy all stakeholders. For example, demands for higher wages can conflict with demands for reasonable prices and acceptable returns.

As Southwest Airlines founding CEO Herb Kelleher noted, the key to delivering outstanding customer service is putting employees first. “If they’re happy, satisfied, dedicated and energetic, they’ll take real good care of the customers. When the customers are happy, they come back. And that makes the shareholders happy.” At Southwest, people and profits are explicitly linked and that has accounted for outstanding profitability over several decades in a highly competitive industry.

Managing stakeholders means navigating relationships between them. It also means motivating them to behave in ways that are also beneficial to other stakeholders and aligned with the goal of maximizing profits. This is what executives are paid to do. Boards of directors must have the courage to make certain that the firm is a good corporate citizen and behaves responsibly.

Leaders at Market Basket and other companies don’t realize that they don’t hold all the picture cards. If they don’t reform their behavior, an angry public will do it for them by boycotting their businesses.

Joseph M. Giglio is a professor of strategic management at Northeastern University’s D’Amore-McKim School of Business.